Egypt should maintain tight monetary policy to contain the risk of inflation as a result of fuel and electricity subsidy cuts, the International Monetary Fund (IMF) said Monday in a statement that praised progress on reforms tied to a new USD2bn loan. The IMF’s remark comes days after the Central Bank of Egypt (CBE) decided to keep interest rates steady, citing inflationary risks as the reason, and after the IMF Executive Board announced Egypt had made sufficient progress on economic reforms to receive its next loan disbursal. “Strong programme implementation and generally positive performance has been instrumental in achieving macroeconomic stabilisation,” IMF First Deputy Managing Director David Lipton said in a statement. He said the country’s near-term growth outlook was “favourable, supported by a recovery in tourism and rising natural gas production.” Meanwhile, Egypt’s strong foreign reserves meant it would likely be able to weather “tightening global financial conditions” that have seen a “shift to capital outflows” in emerging markets in recent months. “The healthy level of foreign reserves and flexible exchange rate leaves Egypt well positioned to manage any acceleration in outflows, but this reinforces the importance of a sound macroeconomic framework and consistent policy implementation,” he said.
 
Our comment: We see IMF’s advice to maintain a tight monetary policy stance matching our forecasts of limited room for rate cuts in the near future. CBE is likely to hold policy rates stable in the current quarter in order to ensure the absence of any negative surprises on the inflation side following the recent energy subsidy cuts. Moreover, the persistence of oil prices at current levels up to later in the year would post upside risks to inflation in 2019 when Egypt is set to target cost-recovery for fuel prices, hence further limiting the room for monetary easing. We, therefore, see CBE maintaining a tight monetary policy, more by holding rates steady rather than by raising them in order to control any potential inflationary risks. Resumption of the easing cycle in the short term would be primarily conditioned on a major correction in oil prices. 

Mohamed Abu Basha